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Ask news.yc: Should the gov't let the current crisis self-correct?

• trevelyan 19y ago
  Keynes pretty much demonstrated that the feast/famine metaphor doesn't apply to economics. imho, the real mess is going to happen when the American public realizes that social security is possibly the least insolvent government program, but that its ongoing surpluses have been handed out in tax cuts and war profiteering. I'm still stunned Gore lost.
• bprater 19y ago
  I think the question is valid, but I really appreciate YHN because it is all hacker related news.
  • aswanson 19y ago
    Yeah, me too. I hesitated to post it, but figured it may spark some interesting discussion.
• deleted 19y ago
  [deleted]
• vitaminj 19y ago
  The unregulated market had a big part to play in causing the current sub-prime mess in the first place. Check out the BBC's explanation of how the sub-prime lending model worked: http://news.bbc.co.uk/2/hi/business/7073131.stm?src=rss http://news.bbc.co.uk/2/hi/business/7073131.stm?src=rss In a nutshell, banks used to lend people money with their own assets. Because it was their own money, they made people jump through hoops to make sure they could pay. But in the new model, banks packaged up mortgages and sold them to investors as mortgage bonds. The investors had no idea about the ability of individual homebuyers to pony up for repayments, but they were making a good return. Now that the banks didn't stand to lose, they loosened the standards on their normal checks and balances so that unemployed hobos could buy $500k homes (since there were no regulatory requirements). Ahhh the free market at work. (The reason why so many banks lost money was because they themselves were big investors in the mortgage bond market) The free market does solve problems and self-correct, but it can also cause a bit of damage along the way. The point of common sense regulation and government intervention isn't to stifle the market, but to prod it in the right direction and minimise the pain. Economists call it smoothing out the business cycle. Granted the highs aren't so high, but neither are the lows.
  • Prrometheus 19y ago
    Cheap credit was at the heart of the mortgage bubble. It fueled an unprecedented rise in housing prices. If housing prices rise at a historic rate for 5 years in a row, who cares about credit quality? Foreclose on a home and you own an asset worth 25% more than the mortgage you made! Don't lower your lending standards and you will make 0 loans in a competitive market where everybody else is giving mortgages away. I worked with subprime mortgage companies. After the bubble started to pop everybody blamed it on stupidity and greed. These qualities were surely involved. What goes up, after all, must come down - but try to time the pop! In the end, the bubble was market-driven and the market was Fed-manipulated. We had a soft recession in 2001 because of cheap credit. We get another recession in 2008 because of that same cheap credit. End of story.
    • vitaminj 19y ago
      Yeah I agree, though my point wasn't so much about the bubble than about the crash. The crash was precipitated by a critical mass of foreclosures, which was attributed mainly to sub-prime borrowers. A softer landing could have been achieved if there were stricter lending regulations, and the bubble wouldn't have been as high either. I wanted to respond to the assertion by the poster that this was all a result of government interference. Yes, the government (via budget deficits) and the Fed (via monetary expansion) were meddling with the market, but the nature of the free market itself was a contributor. The market isn't perfect and neither are regulations, but it's not an all or nothing proposition... there needs to be balance.
      • Prrometheus 19y ago
        The bubble was unprecedented. Hopefully, lenders remember that credit quality matters the next time the fed decides to dump 1% credit on us.
        • anamax 19y ago
          No, it wasn't unprecedented. In fact, this bubble was exactly like every other bubble. EVERY bubble is driven by folks who say "it's different this time". They're wrong every time. As they say "pigs get fat, hogs get slaughtered".
• anamax 19y ago
  > The unregulated market had a big part to play in causing the current sub-prime mess in the first place. And bailing them out will have what effect? If you shield people from the consequences of doing dumb things, they'll keep doing them. People who invested in subprime-mortgage-backed bonds SHOULD lose money. Besides, they were going to keep the profit, so why shouldn't they take the loss?
• Prrometheus 19y ago
  The government can get involved to soften the blow, but it should be careful not to create ANOTHER bubble like it did in 2001.
  • aswanson 19y ago
    An astute individual during the dot-com bubble could have forseen the effect of the market crashing would lead to cheap money and hence a mortgage bubble. What does this latest bubble pop portend for the prescient investor?
    • bayareaguy 19y ago
      If you're shrewd, you may be able to get a good deal on some property. Just stay away from places where there will be new construction when things turn around.
• mattmaroon 19y ago
  What strikes me is the number of people who predicted this whole mess in the first place. Even during the bubble, there were people describing, almost to the minute, exactly what would happen. The market always has its share of chicken littles, but the detail with which some people predicted the crash makes me think they're a little more than that. Rationally, it seems like it will scare institutional investors out of the market and into PE and VC funds, so it might be a better time than ever to run a startup.
  • aswanson 19y ago
    I know. I remember back in '06 listening to a business week podcast where they said "Wall Street has found a way to slice up bad debt and create grade A debt" and thinking,"how the hell is that mathematically possible?" Turns out it wasn't.
    • mattmaroon 19y ago
      Lol. I had only a 700 credit rating at the time, had been self-employed for over 3 years, and was approved for a no-doc loan on a $300k condo with only 10% down. I actually could have afforded it, but there was no way for them to know that and no reason to assume it either. That's when I realized something was wrong.
      • tomjen 19y ago
        If you had been self-employed for three years, then you had properly found a way to make money by yourself (or you would have starved to death before) so what risk is there to lend you the money?
        • mattmaroon 19y ago
          Well, you can scrape by on a lot less than the income required to pay that mortgage when you live in Ohio. And with no documentation and a less than stellar credit rating, plus little down, they were nuts to grant it to me. Luckily for me I didn't purchase the condo, as the housing market there took a nosedive, and I'd currently be unable to sell for less than I'd owe the bank.
• mixmax 19y ago
  Basically what you are saying is that the people that took the risk should also take the hit, which seen from a moral standpoint is obviously right. The problem with this approach though is that the financial markets are notoriously non-transparent and full of feedback loops. This means that the blow will hit a lot of people that didn't take risks, but just happen to be in a bad spot, for instance a young family of blue collar workers that have just bought their first house. They have not had the potential upside, but they will get the downside. This is why government intervenes, not to save the risk-takers.
• bayareaguy 19y ago
  People have been looking the other way for too long. Many borrowers have been led to believe that lying on their loan applications is ok and brokers have been mis-stating the actual risk to the buyers of those loans. It was fun while it lasted but the party's over. I don't think the government should bail out anyone. What they should do is start regulating the entire industry better.